Let’s talk about 2% risk rule

Here is why you should always follow the proportional risk management rule. Let’s consider two simple examples:

1. Proportional growth: Trading on $10000 using proportional risk of 2% per trade
2. Linear growth: Trading on $10000 using fixed lotsize of 0.1Lot and 200 pips StopLoss (= 2% of initial balance)

Just for this example we will simulate a sequence of 100 wining and 100 losing trades (n=0 to 100).
proportional risk management winning trades
proportional risk management losing trades

We can clearly see that proportional risk management not only results in a higher and faster balance growth, but also in a lower total drawndown. In case of fixed lot size the account would blowup after 50 losing trades. So why traders do not use this simple rule? Because this involves some calculation and people do not really know how to do it properly. The proper calculation is as follows:
proportional risk management calculation
Below two simple approaches to deal with this problem:

1. Implement your proportional risk strategy in your EA code


/* Variables */
double Pip,Lots,LotSize;
int StopLoss=100;
double Risk=2;

/* Define 1 Pip */ 
if(Digits==2 || Digits==4) Pip=1*Point; 
if(Digits==5 || Digits==3) Pip=10*Point; 
if(Digits==6) Pip=100*Point;  
	
/* Get new lot size */
Lots=GetLotSize(StopLoss);
	
/* GetLotSize function */	
double GetLotSize(int StopLossPips)
{
   /* Proportional risk management */
   LotSize = NormalizeDouble(((Risk/100)*AccountEquity()/StopLossPips) / (Pip/Point),2); 
   if(LotSize<MarketInfo(Symbol(), MODE_MINLOT)) LotSize=MarketInfo(Symbol(), MODE_MINLOT); 
   if(LotSize>MarketInfo(Symbol(), MODE_MAXLOT)) LotSize=MarketInfo(Symbol(), MODE_MAXLOT);
   return (LotSize);   
}

2. Use an online calculator as provided below:

There is one important thing that should be mentioned here. Trading using proportional lot sizes based on account balance, requires proper Risk:Reward ratio, that should be always smaller than 1:1! This means that Risk should always be slightly smaller than Reward. Let’s think about this for a minute, using a simple example below:
After 1 losing trade of 2% on a $10000 account using 200 pips StopLoss and 0.1 LotSize, the account balance will be equal to $9800. So to breakeven in the next “wining” trade (not including spread) we need to have a TakeProfit level set to: 204pips (R:R = 200:204 = 0.98), since 2% of $9800 is equal only to $196. Winning back 2% of the account balance after losing 2% is not enough to breakeven!

So that’s it! If you have any questions you can always mail me.

Greets,
Chris


[DISCLAIMER]: This site contains valuable and informative high quality material, that can be used for any kind of trading. The presented information is meant for non-commercial, informational and personal purposes only, and all of freely downloadable materials are meant for non-commercial home use only. To the maximum extent permitted by applicable law, in no event shall Coensio.com, or its suppliers be liable for any special, incidental, indirect, or consequential damages whatsoever (including, without limitation, damages for loss of business time, business profits, business information, or any other kind of loss) arising out of the use of, or inability to use the Software developed by coensio.com, or the failure to provide support services, even if Software, or one of its supplies has been advised of the possibility of such damages. Copyright © 2021 coensio.com. The majority of the links in coensio.com posts and sidebar are affiliate program links. This means that (most of the time) when you purchase a product linked from my site, owner(s) of this website receive a commission. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. [OUR PRIVACY POLICY]: READ HERE